Econ test 1
List 3 benefits of trade
1.) trade makes people better off when preferences differ 2.) Trade increases productivity through specialization and the division of knowledge 3.) trade increases productivity through comparative advantage
what 5 factors can change shift the supply curve?
1.)technological innovations and changes in price of inputs, 2.) taxes and subsidies, 3.) expectations, 4.) entry/exit of producers, 5.) changes in opportunity cost
What is the difference between a normal good and an inferior good?
a normal good is a good which demand increases when income increase. an inferior good is when demand decreases when income increases (ramen)
comparative advantage
ability to produce a good or service at a lower opportunity cost than another producer
absolute advantage
ability to produce the same good using fewer inputs than another producer
Where is producer surplus on a graph?
above supply curve and below the price
Total consumer surplus
add up all consumer surplus for each consumer for each unit, the shaded area beneath he demand curve (can be calculated by. (Base x height)/2)
production possibilities frontier (PPF)
all the combinations of goods that a country can produce given its productivity and supply of inputs
total producer surplus
area above supply curve and below the price
Where is consumer surplus on a graph?
below the demand curve and above the price
what is consumer surplus?
consumer's gain from exchange, difference between the maximum price a consumer is willing to pay for a certain quantity and the market price (Joanne will pay $25 for oil although it only costs $20, Joanne earns a consumer surplus of $5)
What does the surplus do to equilibrium?
drives price down
What is a demand curve?
function that shows the quantity demanded at different prices
What is the "law of supply"?
higher the prices, the greater the quantity supplied
What does specialization do to productivity? Why?
Specialization increases productivity because it increases knowledge
what is the supply curve?
a function that show the quantity supplied at different prices
Usain Bolt is the world's fastest human. Usain could probably mow his lawn very quickly, much more quickly and at least as well as Harry, who mows lawns for a living. Why would Usain Bolt pay Harry to mow his lawn rather than do it himself?
Usain Bolt has a comparative advantage in running, but Harry has a comparative advantage in mowing Usain's lawn because Harry faces a much lower opportunity cost in mowing lawns than Usain Bolt does
who competes with who?
sellers compete with other sellers, buyers compete with other buyers
What does shortage do to equilibrium?
shortage drives prices up
What is a substitute? what are complements?
substitute- 2 goods decrease in price, one causes decrease in demand of other complements- 2 goods decrease in price of one causes increase in demand of other (hamburger and bun)
opportunity cost
value of opportunities lost
What does change in demand mean?
when non-price factor (demand shifter) changes, shifts entire demand curve
what is surplus?
when quantity supplied is greater then the quantity demanded, competition will push prices down whenever there is a surplus
What is a shortage?
when the quantity demanded is lower than the quantity supplied, competition will push prices up whenever there is a shortage
What is quantity supplied?
quantity that sellers are willing and able to sell at a particular price
if demand increases which direction does the curve move?
right
if supply increases which direction does the curve move?
right
what is quantity demand?
the quantity that buyers are willing and able to buy at a particular price
What is equilibrium?
the state in which market supply and demand balance each other, causes prices to be more stable
How does trade create value?
It moves goods from people that value them less to people that value them more (laser pointer)
How does trade let us benefit from the advantages of specialization?
If people can't trade for other goods, they won't specialize in producing just one good. Thus, trade is necessary if people are to benefit from specialization
What are 6 important demand shifters?
income, population, price of substitutes, price of complements, expectations, and tastes
What is the "law of demand"?
lower the prices, greater the quantity demanded
how do countries increase wealth?
make goods that they can at low cost and buy the goods that they would be making that are high cost
what does change in quantity demanded mean?
movement along the demand curve
What is producer surplus?
producer's gain from exchange, difference between market price and the minimum price at which a producer would be willing to sell at a particular quantity (producer benefits)
